The Bank of Japan faces a “protracted battle” for control over yields on the benchmark 10-year government bond, say analysts, as global markets and the sliding popularity of Prime Minister Shinzo Abe threaten to push market interest rates higher.
Warnings of repeated summer confrontations between the BoJ and the Japanese government bond (JGB) market come as investors spent Monday adjusting to BoJ governor Haruhiko Kuroda’s decision last week to draw a clear line in the sand, after the 10-year JGB yield crept above 0.1 per cent for the first time since February.
By stepping into the market with an offer to buy an unlimited amount of JGBs on Friday, traders said the BoJ was deploying the most potent weapon at its disposal as the central bank defended its 10-month-old policy of holding the 10-year benchmark at “around 0.0 per cent”.
The move has dimmed speculation that the central bank might gradually raise its intervention point from 0.11 per cent to 0.2 per cent — a latitude that, according to some analysts, would have signalled a turning point to investors and revived interest in Japan’s banking sector.
After Friday’s intervention, Deutsche Bank’s banking analyst Yoshinobu Yamada said the cap “makes it difficult to justify a bullish stance on the bank stocks”.
Upward momentum in yields of late had been driven in part by weakness across developed market bonds and from the BoJ’s reduced buying of JGBs with a maturity of between one and five years.
International investors have questioned the BoJ’s commitment to buy ¥80tn of sovereign debt this year, the official target, at a time when the world’s central banks appear to be preparing for a co-ordinated reduction in monetary stimulus.
Robert Michele, head of fixed income at JPMorgan Asset Management, said, “the Bank of Japan is engaged in a closet tapering”. The asset manager calculates that, based on the pace of bond buying this year, the BoJ is on track to buy only about ¥50tn worth of JGBs.
Despite the impact of the BoJ’s move, which pushed yields down to 0.09 per cent on Monday, analysts believe that the coming weeks could see the central bank’s commitment tested several more times.
The pressure reflects how Japan’s position may be out of step with the hawkish words of central banks in other developed markets. The US Federal Reserve is already raising interest rates and others have signalled a move towards tightening. Since the last week of June, the difference between yields for 10-year JGBs and their German counterpart has widened by 27 basis points.
However, Japan’s persistently low inflation and resistance to substantial wage increases, said Citigroup economist Kiichi Murashima, did not permit the BoJ to consider policy normalisation. He added that the central bank move on Friday signalled Mr Kuroda’s thinking “that allowing even the slightest rise in long-term yields would be premature”.
Looming over that, say Mr Murashima and other analysts, is the risk that Japanese politics drive rates higher over coming months. The sudden decline in public support for Mr Abe — confirmed by two recent opinion polls and a crushing defeat for his party in the Tokyo assembly elections — may raise doubts over the sustainability of the BoJ’s ultra-aggressive monetary policies, and if the architect of that policy, Mr Kuroda, will be reappointed as governor.
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